As other assets turn volatile, this is what the rich are buying

High net-worth individuals (HNIs) are once again eyeing a larger pie of the Indian real estate market, particularly commercial real estate. One reason for their renewed interest is the increasing volatility across other asset classes and improvement in the regulatory environment in the sector.

Another reason is that commercial realty offers cash flow for investors. With yields in residential property coming down to about 2-3%, the yields offered by commercial property, around 7-8%, or sometimes even 11%, look very attractive, said experts.

Yields or returns form real estate investment are calculated on the basis of the capital value of the property and the rent it earns.

A favourable macroeconomic environment has given a major boost to the absorption rates in commercial property in the first half (H1) of 2018. Estimates reveal that around 22-24 million square feet of office space has been leased across top cities in H1 2018. IT/ITeS sectors dominated the leasing activity, followed by BFSI (banking, financial services and insurance), co-working, manufacturing, etc.

Why is commercial real estate attractive?
“Typically, about 30-35% of the investment portfolio of HNIs and ultra-HNIs (UHNIs) comprises real estate as an asset class. Owing to the slowdown in the residential real estate sector over the last two to three years, HNIs turned their attention towards other sectors, particularly commercial office spaces,” said Anuj Puri, chairman, 
Anarock Property Consultants.

According to Tejas Patil, co-head of real estate at Sanctum Wealth Advisors, one of the reasons why UHNIs and HNIs get attracted to pre-leased real estate is from a cash flow perspective.

“HNIs would consider if there is another option other than commercial real estate to achieve their goal of cash flow. Residential real estate does not offer yields more than 2-3% and is mostly for upside. Hence, investors who want more cash flows prefer pre-leased assets and commercial assets, including office spaces,’’ he said.

This segment gives returns that are similar to debt investments and also gives an added benefit of owning an asset, which could offer capital appreciation in the future.

What kind of properties do investors prefer?
There is high interest for commercial leased assets among investors in premium office assets across cities. With demand for Grade A office space in prime locales rising significantly, most HNIs prefer to invest into these low-risk and high income-generating assets. They prefer to get fixed rental income, which is much higher than residential properties, said Puri. 

“Typically, demand for Grade A office space is growing, while its vacancy levels are sliding south in prime locales. The listing of the first Real Estate Investment Trusts (Reit), expected to happen anytime soon, is also attracting investors. As of now, these properties are largely commercial including office spaces that generate a rental income, likely to be followed by others, including shopping centres, hotels, etc,’’ said Puri.

Just like mutual funds, Reits are investment vehicles that own, operate and manage a portfolio of income-generating properties for regular returns.

Other than commercial spaces, like a commercial IT building, warehousing is also seeing a lot of interest following the goods and services tax implementation, said Patil. Another trend that is catching on is student housing or rental housing. It may not be a hostel per se, but a service apartment that is rented out to students or to employees of a corporate, so it becomes corporate housing.

Why student housing?
Rents in student housing can be higher than rents for commercial office spaces, said Patil. “Since parents pay for students, they don’t mind if the rent increases by Rs 2,000 -5,000 in a month, because the services and facilities are like that in a three- or four-star hotel - free Wi-Fi, unlimited electricity, security and someone to overlook. Also, students get to stay with people of their age, etc,’’ Patil explained.

Investors must keep some factors in mind while investing in a property being developed, such as student housing or corporate housing is the proximity to the catchment area. In other words, how close it is to the college/university or the office. “It will not work if the distance is more than 3 km. Since you are basing your revenue and cash flow projections on the number of beds the university/hospital/corporate will rent, you can’t be too far away,’’ he added.

As per government estimates, there are 34 million students in the higher education space, growing at a compounded annual growth rate (CAGR) of 9.2%. With the current supply pegged at just 6.1 million beds, student housing offers massive unmet demand across the country. Thus, it has tremendous potential for both developers and investors alike, said Puri.

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“Student housing provides developers a window to diversify their portfolio from the usual residential or commercial sectors. As for investors, since student housing is still at a very nascent stage in India, it offers immense potential for higher returns, much higher than the established assets including office and retail. The current rental yield for student housing segment is between 14 and 18%,’’ he added.

Source: DNA Money